Our recent column about annuities sparked a round of questions
from
readers who are trying to decide whether the investments are right for
them.

To review, we were talking about immediate annuities -- the
plain-vanilla investment contracts that guarantee you a lifetime stream of
income in exchange for a large, upfront payment. A recent study found that
those kinds of annuities bought individually, instead of through pension
plans, pay women less -- and cost both sexes more.

Even without that wrinkle, many retirees have steered clear of
annuities, partly because they're complicated, and because it's tough to
tell whether they're a useful tool. With that in mind, we decided to clear
up some of the confusion -- and we asked several financial-planning
experts
to recommend ways they would use annuities in retirement planning.

Annuities typically come in two shapes: "fixed" or "variable."
Immediate
fixed annuities are the more conservative choice, generally promising a
predictable monthly check for the rest of your life in return for your
chunk of cash up front. With variable annuities, you decide how your money
is invested (usually, in mutual funds). That often translates into
more-volatile swings in variable annuities' returns, though a few products
do set minimum payments.

A word of caution: There are very few cases in which variable annuities
make sense for retirees seeking to maximize their returns. Most
financial-planning specialists advise older adults to steer clear of
variable annuities. The reasons: In addition to their volatility, variable
annuities can create tax headaches and often carry high fees and surrender
charges. Still, brokers routinely pitch them to retirees. For example,
reader David Quigley says that at least three investment firms in the Fort
Lauderdale, Fla., area this spring have been touting a variable annuity
nicknamed "the 7% solution." He considered investing, he writes, but
finally decided it was "too confusing and, in my opinion, more of a risk
than I care to take."

The marketing is so pervasive that the National Association of
Securities Dealers has urged brokers to use restraint in selling variable
annuities to older customers for whom they may be "inappropriate." And the
Securities and Exchange Commission in 2000 issued an "investor alert"
cautioning investors who already own an annuity that they "may be better
off" not switching to new ones because of sales charges, commissions and
surrender penalties that are incurred.

But with the simpler, immediate fixed annuities, some readers simply
rankle at the idea of parting with the nest egg they worked so hard to
build, in exchange for a monthly payment that expires as soon as they do.
As Mel Langer of Diamond Bar, Calif., puts it: "It sticks in my throat
that
after the annuitant dies, the insurance company keeps the money. You're
betting you'll live, and they're betting you'll die." (There are fixed
annuities that continue payments to an owner's beneficiary, although such
products typically offer lower monthly payments.)

Several financial planners and economists offer this advice: If you're
looking for a steady source of cash to pay your bills each month,
particularly if you don't have a pension and you're worried about
outliving
your money, consider using annuities as an investment tool -- just don't
tie up too much of your savings in them.

A recent study by economist John Ameriks of TIAA-CREF, a nonprofit
pension and financial-services company in New York, found that a
65-year-old would significantly reduce the likelihood of outliving his
money by annuitizing 50% of his assets.

Mr. Ameriks reached that conclusion by running computer simulations,
known as "Monte Carlo analysis," to figure out the probability of a
65-year-old's draining his assets prematurely if he were to withdraw 4.5%
of his initial assets every year (adjusting for inflation each time) for a
set number of years. He used four portfolio types -- conservative,
balanced, growth and aggressive -- and time periods in five-year
increments
ranging from 20 to 40 years. For example, annual withdrawals over 30 years
from a "growth" portfolio made up of 60% stock, 30% bonds and 10% cash
would deplete the non-annuity part of the portfolio early 12.6% of the
time. But if half those assets were annuitized, that likelihood drops to
3.3%.

There's another advantage, too, says Mr. Ameriks: "Once you have that
annuity income, something coming in every month that you can count on, you
can take a better look at the rest of your assets and how you can make
them
grow." Although his model didn't take Social Security income into account,
he suggests factoring that, along with any private pension payments you
receive, into the amount you need to have on hand each month to pay fixed
bills.

Even when shopping for a fixed annuity, cautions Christine Fahlund, a
senior financial planner at T. Rowe Price Associates in Baltimore, take
the
time to make some comparisons. Fees and interest rates can vary widely
among different companies. A quick look at www.annuity.com, a Web site
that offers information about and markets annuities,
shows that current rates for fixed annuities range from as low as 4.05% to
as high as 9.5%. It's important to ask about the financial strength of the
insurer offering the annuities as well, she says, because "once you
annuitize those assets, you don't own them anymore. The company does."

Ms. Fahlund recommends investing no more than 60% of your assets in
annuities, so you still have money available for emergencies. Some
planners
recommend investing a smaller portion of your savings, some limiting
annuities to as little as 25% of your nest egg.

You also should think about ways to beat inflation, because that
$1,000-a-month annuity payment you could get now won't go as far in 15 or
20 years, she says. Depending on your age and health, you might want to
buy
two to three different annuities and start receiving payments from one
annuity now, while allowing the others to grow tax-deferred for several
more years before starting to collect payments from them, too.

Still wavering over whether annuities are right for you? "Then try it
with a small amount of money and see how it works," says Mr. Ameriks.
"There's no need to do it all at once."